Beneficiary Designation

Many folks develop a very well thought out estate plan and beautifully crafted companion documents. In many cases, they believe that the overall plan is complete. This couldn't be further from the truth. It is critical to review your beneficiary designations so that you can be certain that the assets will flow to the heirs you desire and in the manner that you believe to be in the best interest of your family. Frequently, the assets that require a beneficiary designation are directed to the wrong or inappropriate beneficiaries. The types of investments that require beneficiary designations include an annuity, a life insurance policy and/or any retirement plan assets.

Before you take this step of naming a specific beneficiary, it is important that you comprehend the tax impact of your designation to a third party beneficiary. If you designate an inappropriate or improper beneficiary when dealing with an annuity or a retirement plan, you may trigger a large and unwanted income tax liability for the ultimate beneficiary. A life insurance policy will pass to a beneficiary or a trust without any income tax ramification. In all cases, the annuity, life insurance policy, or retirement plan assets are totally includable in your estate for estate tax purposes. It is important to differentiate between income tax ramifications to both your estate and your beneficiaries and the estate tax ramifications.

If you name a family member as a beneficiary, then you should also give thought to the possibility that the beneficiary may predecease you and in turn you may have been unable to change your beneficiary designation prior to your death. In this case, you want to consider a secondary beneficiary. Many families utilize trusts as the beneficiary of their estate. Great care must be taken when crafting the trust in order to limit or reduce any income tax ramifications based on the designation.

It is important to review every beneficiary designation. Working with your financial planner, accountant or lawyer, you should revisit every beneficiary form and make certain that the designation is coordinated with your overall estate and financial plan.


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